A Multifactor ETF For Globetrotting Investors

Multifactor exchange traded funds have grown beyond the confines of domestic equities to include ex-U.S. developed and emerging markets.

Some of the funds are proving to be popular among investors seeking international equity exposure, including the Goldman Sachs ActiveBeta International Equity ETF GSIE. GSIE, which turns three years old in September, has $1.03 billion in assets under management.

What Happened

GSIE follows a similar methodology to what is found on the Goldman Sachs ActiveBeta U.S. Large Cap Equity ETF GSLC, one of the largest multifactor ETFs in the U.S.

Goldman's ActiveBeta ETFs follow “a performance-seeking methodology that aims to acquire stocks based on four well-established attributes of performance: good value, strong momentum, high quality and low volatility,” according to the issuer.

GSIE is positioned as an alternative to cap-weighted approaches to the MSCI World ex-USA Index or comparable benchmarks.

GSIE “holdings have a smaller average market capitalization than the constituents of [the] parent index,” said Morningstar. “However, they tend to trade at similar valuations. This is because the fund's momentum and quality sleeves pull the portfolio toward pricier names, while its value sleeve leans in the other direction.”

Why It's Important

To lure investors, multifactor funds must either be cost-effective, significantly less volatile or offer superior returns relative to cap-weighted rivals. GSIE checks some of those boxes. Since coming to market, GSIE has outperformed the MSCI ACWI ex-USA Index by a healthy margin while being significantly less volatile.

GSIE has also sharply outperformed the MSCI EAFE Index by a wide margin over that period, a relevant comparison because the Goldman fund tilts toward developed markets.

“This strategy is off to a good start. From its inception in November 2015 through June 2018, the fund beat the MSCI World ex-USA Index by 1.33 percentage points annually, partially thanks to more favorable stock exposure in the consumer defensive and health care sectors,” according to Morningstar.

What's Next

GSIE, which garners a Bronze rating from Morningstar, allocates over 43 percent of its geographic weight to European markets excluding the U.K., while Japan and the U.K. combine for 37 percent.

GSIE's multifactor approach “diversifies risk, reducing the chance of experiencing an extended period of underperformance and making it easier to stick with the factors through their inevitable rough patches,” said Morningstar.

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